Investor Sentiment and Accounting Conservatism

2018 ◽  
Vol 33 (1) ◽  
pp. 83-102
Author(s):  
Rui Ge ◽  
Nicholas Seybert ◽  
Feida (Frank) Zhang
Keyword(s):  
Investor Sentiment ◽  
Accounting Conservatism ◽  
Economic Losses ◽  
Price Sensitivity ◽  
Litigation Risk ◽  
Timely Manner ◽  
Financial Expert

SYNOPSIS This paper investigates the association between investor sentiment and accounting conservatism. We find that managers recognize economic losses in earnings in a more timely manner during periods of high investor sentiment. Further, the sentiment-conservatism relation is stronger for firms with greater sentiment-price sensitivity. We also find that the sentiment-conservatism association is stronger for firms with higher litigation risk and financial expert CEOs, and is weaker for firms with retiring CEOs. Overall, our results suggest that firms report earnings more conservatively in response to higher investor sentiment in order to mitigate potential litigation costs. These findings have implications for regulators and standard setters who have deemphasized accounting conservatism in recent years.

Investor sentiment and accounting conservatism: evidence from Iran

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Saeid Aliahmadi
Keyword(s):  
Capital Market ◽  
Negative Impact ◽  
Investor Sentiment ◽  
Accounting Conservatism ◽  
Bad News ◽  
Economic Losses ◽  
Timely Manner ◽  
Content Type ◽  
Conservative Accounting ◽  
The Impact

Purpose The main purpose of this study is to investigate the effect of investor sentiment on accounting conservatism in listed companies in the Tehran Stock Exchange (TSE). Design/methodology/approach In this paper, two models of Ball and Shivakumar (2006) and Basu (1997) have been used for measuring conditional conservatism in accounting. To measure investor sentiment, the author uses the Baker and Wurgler (2006, 2007) index. The research sample consists of 1,820 observations and 182 firms listed on TSE over a ten-year period between 2011 and 2020. This study uses panel data and multivariate regression analysis to test it hypotheses. Findings Consistent with this hypothesis that accounting conservatism will increase with investor sentiment, the results showed that Iranian firms recognize economic losses and bad news in a more timely manner during high sentiment periods than during low sentiment periods. This implies that Iranian managers recognize economic losses and bad news in earnings in a more timely manner during periods of high investor sentiment. Practical implications This finding provides significant evidence for investors and financial reporting standard-setters in Iran because by removing accounting conservatism from the conceptual framework, managers are not able to present conservative financial reports, and this can intensify the negative impact of investors sentiment in the Iranian capital market. Managers of Iranian companies can reduce information asymmetry and increase capital market efficiency by accelerating the disclosure of bad news. Thus, managers can strategically recognize losses and prevent investors from making emotional decisions that reduce their wealth. Originality/value To the best of the authors’ knowledge, this is the first study to empirically examine the impact of investor sentiment on accounting conservatism in a developing market called Iran. This study contributes to the corporate disclosure literature. Also, the result of this study contributes to standard-setters of accounting standards to improve the mandatory disclosure literature on more conservative accounting earnings.

scholarly journals Does a Manager Respond to a Going-Concern Audit Opinion with an Asymmetry in Gain and Loss?

2021 ◽  
Vol 13 (8) ◽  
pp. 4425
Author(s):  
Taewoo Kim
Keyword(s):  
Time Series ◽  
Accounting Conservatism ◽  
Timely Manner ◽  
Audit Opinion ◽  
Going Concern ◽  
Asymmetric Timeliness ◽  
Gain And Loss ◽  
Audit Opinions ◽  
The Relationship

In this paper, I investigate the relationship between previous going-concern audit opinions and subsequent asymmetric timeliness in accounting. Using the time-series and price-based models and conservatism proxy, I find that firms with going-concern audit opinions subsequently report losses in a more timely manner than firms that did not receive going-concern audit opinions. Furthermore, I also find that firms exiting going-concern audit opinions are more likely to report losses rather than gains in a timely manner, compared to firms non-exiting from going-concern opinions. This study extends the prior research by exploring the association between going-concern opinions and accounting conservatism from the perspective of client firms—that is, how firms behave strategically and conservatively to bypass going-concern opinions, once the firms had received previous going-concern opinions.

scholarly journals The Effect of Financial Distress, Firm Size, Leverage and Litigation Risk on The Application of Accounting Conservatism In Manufacturing Companies Listed In Indonesia Stock Exchange

2021 ◽  
Vol 6 (2) ◽  
pp. 100-106
Author(s):  
Ira Septriana ◽  
Hermawan Triyono ◽  
Agung Prajanto
Keyword(s):  
Firm Size ◽  
Financial Distress ◽  
Sampling Method ◽  
Stock Exchange ◽  
Sample Selection ◽  
Accounting Conservatism ◽  
Litigation Risk ◽  
Test Results ◽  
Manufacturing Companies ◽  
Research Criteria

This research aims to analyze the effect of financial distress, firm size, leverage, and litigation risk on implementing the accounting conservatism of manufacturing companies in Indonesia. The population in this research is manufacturing companies listed on the Indonesia Stock Exchanged (IDX) over 2014-2018. Research sample selection used the purposive sampling method. Obtained company data that meet the research criteria as many as 169 companies, so that the total research data is 149 data. The analysis methods in this research are multiple regression analysis. Based on the test results of the research conclude that variables of the board of financial distress, firm size, and litigation risk have no effect on accounting conservatism implemented of manufacturing companies. Meanwhile, the variable of leverage affects the accounting conservatism's implemented by manufacturing companies.  Keywords: Conservatism Accounting. Financial Distress, Firm Size, Leverage, Litigation Risk 

scholarly journals Telaah Literatur Tentang Faktor-Faktor yang Mempengaruhi Konservatisme Akuntansi

2012 ◽  
Vol 8 (2) ◽  
Author(s):  
Lia Alfiah Dinanar Hati
Keyword(s):  
Conflict Of Interest ◽  
Financial Distress ◽  
Accounting Conservatism ◽  
Litigation Risk ◽  
Political Costs

This paper examine several factor that impact to accounting conservatism practice. Conservatism is commonly defined as the differential verifiability required for recognition of profits versus losses. Regardless of the different opinion about role of accounting conservatism, in fact, this principle is still in uses until now and be one of the dominant principle in accounting. Through this article the author do review of several previous studies about accounting conservatism at Indonesia and other country. From several review we conclude that accounting conservatism is affected by factors of contracting, litigation risk, political costs, regulations, financial distress and conflict of interest between shareholders and bondholders.

scholarly journals Company’s Sustainability and Accounting Conservatism: Firms Delisting from KOSDAQ

2019 ◽  
Vol 11 (6) ◽  
pp. 1775 ◽  
Author(s):  
Hyuk Shawn ◽  
Yun-wha Kim ◽  
Jae-gyung Jung
Keyword(s):  
Capital Market ◽  
Earnings Quality ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Accounting Conservatism ◽  
Litigation Risk ◽  
Reported Earnings ◽  
Quality Measurements ◽  
The Capital Market

This paper finds evidence that delisting firms make reported earnings more conservative to avoid litigation risk. Conservatism has been used as one of suitable reporting quality measurements that is separate from discretionary accruals, in that investors can monitor the firm’s contract efficiency or litigation risk by demanding conservatism. We collect a sample that is composed of 6348 listed non-financial companies for the period 2009–2016. Our results are as follows. First, we find that companies ahead of delisting are more conservative than other companies in Korean Securities Dealers Automated Quotations (KOSDAQ). Second, companies that are ahead of delisting whose auditor is non-big4 are significantly more conservative. Our results imply that companies that are in the process of delisting are seeking to increase their sustainability and to improve earnings quality, such as conservatism, and that small auditors are more conservative in order to mitigate the higher risk of litigation in comparison with big4 auditors. This study has a role to complement prior studies regarding delisting, and provides that the delisting institutions in KOSDAQ market can improve the efficiency and the reliability of the capital market.

Tone Concavity around Expected Earnings

2019 ◽  
Vol 95 (1) ◽  
pp. 133-164 ◽  
Author(s):  
Carlo D'Augusta ◽  
Matthew D. DeAngelis
Keyword(s):  
Accounting Conservatism ◽  
Litigation Risk ◽  
Earnings Expectations ◽  
Consensus Forecasts ◽  
Expected Earnings ◽  
Earnings Performance ◽  
The Difference ◽  
Disclosure Tone ◽  
The Relationship ◽  
Future Growth

ABSTRACT We examine whether the relationship between managerial tone and earnings performance depends on the performance of the firm relative to earnings expectations. Using both annual changes in earnings and the difference between realized earnings and analyst consensus forecasts, we find evidence of “tone concavity” around earnings expectations. Specifically, the covariance between managerial tone and earnings performance is positive when earnings are below expectations, but negative when earnings meet or exceed expectations. We interpret our results to suggest that managers downplay positive changes in earnings to attenuate future growth expectations. We also find that tone concavity is significantly attenuated by managers' career concerns and accounting conservatism, but unrelated to litigation risk. Our results indicate that the effect of earnings performance on disclosure tone is complex and reflects managers' incentives to manage expectations.

Shareholder Litigation and Conservative Accounting: Evidence from Universal Demand Laws

2020 ◽  
Author(s):  
Hariom Manchiraju ◽  
Vivek Pandey ◽  
K. R. Subramanyam
Keyword(s):  
Corporate Governance ◽  
Insider Trading ◽  
Accounting Conservatism ◽  
Litigation Risk ◽  
Short Term ◽  
Conservative Accounting ◽  
Shareholder Litigation ◽  
Ex Ante ◽  
Governance Quality ◽  
Corporate Governance Quality

We use the staggered adoption of the Universal Demand Laws (UD Laws) to examine the effect of an exogenous reduction in shareholders' ability to litigate on the extent of accounting conservatism. On average, we find an increase in reporting conservatism post UD. The increased conservatism is concentrated in firms contemplating equity issuance, with high proportion of monitoring investors, and high corporate governance quality. In contrast, firms with specific short-term incentives for aggressive accounting, such as those narrowly beating benchmarks, those with abnormal insider trading and those likely to violate debt covenants, weakly governed firms, and firms with high ex ante litigation risk decrease reporting conservatism after UD. Our results suggest that the relation between the litigation environment and reporting conservatism is complex and dependent on specific characteristics and unique circumstances of the firms.

Investor Sentiment and Accounting Conservatism

2017 ◽  
Author(s):  
Rui Ge ◽  
Nicholas Seybert ◽  
Feida Zhang
Keyword(s):  
Investor Sentiment ◽  
Accounting Conservatism

scholarly journals Accounting conservatism and income smoothing practices in EU food and drink industry

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Francesco Paolone ◽  
Mohammad Albahloul ◽  
Riccardo Tiscini
Keyword(s):  
Listed Companies ◽  
Fundamental Principle ◽  
Income Smoothing ◽  
Accounting Conservatism ◽  
Economic Losses ◽  
Content Type ◽  
Conditional Conservatism ◽  
Food And Drink ◽  
Informational Environment ◽  
The Eu

PurposeThe purpose of this paper is to identify the application of the fundamental principle of accounting conservatism within the EU food and drink industry. Furthermore, the authors would also investigate in-depth the above relationship in two different subsamples (income smoothers and non-income smoothers).Design/methodology/approachAll EU-listed companies of the food and drink industry were identified covering the year 2019. Eckel's model was used to classify listed companies as smoothing or non-smoothing, and Basu's model was adopted to test the degree of conditional conservatism.FindingsThe results indicate that conservatism is strongly present in food and drink industry and also in its subindustries. We also showed that non-smoothing firms had higher levels of conditional conservatism in terms of more opportunity to recognize future economic losses because the market could use the stock return data to anticipate future losses contained in the information regarding profits.Research limitations/implicationsOne limitation of this work is the small size of the investigated companies. The authors demonstrate that the likely increased use of conservatism produces better credibility in the EU markets. Practical implications indicate a higher degree of monitoring of the accounting practices adopted by firms. Regulators have to set accounting policies to enhance the quality of the informational environment, investors and shareholders might exercise control over executives' decisions, and lenders might impose contractual clauses requiring the timely disclosure of “bad news.”Originality/valueThis industry is “belted” from any external speculations. This research made it possible also to observe theoretical relationships between the financial information provided by the EU food and drink industry that contributes to the market distinction between smoothers and non-smoothers.

Investor Sentiment and Stock Market Response to Earnings News

2012 ◽  
Vol 87 (4) ◽  
pp. 1357-1384 ◽  
Author(s):  
G. Mujtaba Mian ◽  
Srinivasan Sankaraguruswamy
Keyword(s):  
Stock Market ◽  
Stock Price ◽  
Investor Sentiment ◽  
Price Sensitivity ◽  
Market Response ◽  
High Volatility ◽  
Jel Classifications

ABSTRACT We examine whether market-wide investor sentiment influences the stock price sensitivity to firm-specific earnings news. Using the recently developed measure of investor sentiment by Baker and Wurgler (2006), we find that the stock price sensitivity to good earnings news is higher during high sentiment periods than during periods of low sentiment, whereas the stock price sensitivity to bad earnings news is higher during periods of low sentiment than during periods of high sentiment. This influence of sentiment is especially pronounced for the earnings news of small stocks, young stocks, high volatility stocks, non-dividend-paying stocks, and stocks with extremely high and low market-to-book ratios. Further analysis suggests that the sentiment-driven mispricing of earnings contributes to the general mispricing of stocks due to investor sentiment. JEL Classifications: D14; D21; G24.

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